Investment Market Update - May 2009
By any measure 2007–08 was a difficult year for financial markets and investors, given the extreme volatility experienced in global markets as a result of what is now widely labelled the 'Global Financial Crisis' (GFC).
However, the second half of 2008, and the first quarter of 2009, has only seen this situation deteriorate further as the GFC’s grip extended beyond world financial markets to negatively affect wider world economic growth, employment markets and ultimately consumer confidence generally.
The past nine months has as well seen a number of major economies fall into recession, including the USA, UK, Japan and most major EU countries. While the March quarter data is expected to confirm that Australia is now in a technical recession, as determined by two consecutive quarters of negative GDP growth, as many commentators have argued, it doesn’t really matter—it feels like a recession in any event.
Many commentators attribute the collapse of Lehman Brothers investment bank as the catalyst that pushed the World’s investment markets over the edge, sparking a rout on world stock exchanges and other listed markets as investors sought to de-risk and de-leverage themselves and make for the relatively safer havens of cash and sovereign bonds (fixed interest). At the same time, banks the world over were limiting access to credit in the last quarter of 2008 and into 2009.
While Australia’s economy arguably fared better during this period, it was far from immune from these tumultuous events. Indeed, our share market, as measured by the ASX200 Index, finished 2008 some 30% lower than its July 2008 level. During this period, Australia’s commodity prices suffered as well, which affected its export earnings, and the Australian Dollar retreated from being near-parity with the US Dollar at the start of 2008 to around $0.68¢.
During the first quarter of 2009 the governments of a number of major world economies, such as the US, Japan and Europe, rolled-out a range of stimulus packages and measures designed to stem the economic carnage and to, in the words of the US President, “stabilise the patient”.
At the time of producing this report it appears that these actions may be having the desired effect. The Australian and other World share markets clawed back some of the losses experienced over the past 12 months and performed positively in March, daily volatility in these markets has moderated, banks have resumed lending (albeit cautiously) and the price falls experienced in the commodity markets have stabilised.
So, against this background, how has MilitarySuper fared?
MilitarySuper’s Investment Performance
MilitarySuper, like all superannuation funds, maintains a diverse spread of investments across both listed and unlisted investments and markets. Just as Australian households and businesses have seen their balance sheets affected by falling asset prices, so too has MilitarySuper and all other superannuation funds.
Listed share markets have fallen some 50% over the past year, directly impacting on MilitarySuper’s investment returns, as reflected in the reduction in the value of our daily unit prices. However, we have been somewhat cushioned from the full brunt of negative returns as a result of our strategic investment policy and asset allocation model which provides that MilitarySuper maintains a sizeable exposure to unlisted assets, such as infrastructure, property and private equity, which to a degree do not move in parallel with the movements in listed markets.
This investment strategy, coupled with a decision by the Board in late 2007 to invest net new funds in cash rather than equity and growth-orientated asset classes, has held us in good stead, as evidenced by the table below which illustrates the relative performance of MilitarySuper’s default (Growth) option, which most Members are invested, as against it peer universe.
| 1 Month Return | 3 Month Return | FYTD Return | 1 Year Return | 3 Year Return | 5 Year Return | |
|---|---|---|---|---|---|---|
| MilitarySuper's Net Return | -3.78% | -5.91% | -5.01% | -4.48% | 3.17% | 7.75% |
| SuperRatings's Median Fund return | -4.73% | -7.43% | -22.85% | -26.03% | -6.60% | 2.43% |
| MilitarySuper's Outperformance | 0.95% | 1.52% | 17.84% | 21.55% | 9.77% | 5.32% |
| MilitarySuper's Rank | 22nd of 78 | 20th of 78 | 1st of 77 | 1st of 79 | 1st of 73 | 1st of 62 |
| Quartile | 2nd | 1st | 1st | 1st | 1st | 1st |
As at end February 2009. Source: SuperRatings
This has been a strong and durable performance for our Fund, especially during the past 12 months, but more importantly over the longer term. Unlisted assets are formally valued less frequently (usually monthly or quarterly) than listed assets (daily by stock markets and other indices). Therefore, where these assets have experienced a similar, or more moderate fall in value during the last quarter of 2008 and early 2009, these lower values have and are being factored into unit pricing as these are received.
Despite the difficult investment environment we are currently experiencing, for the financial year to March 2009, MilitarySuper continues to achieve competitive investment returns net of taxes, fees and charges as follows:
| Strategy | Percentage change since 1 July* |
|---|---|
| Cash | +3.9662% |
| Conservative | -3.0995% |
| Balanced | -7.2259% |
| Growth (default) | -7.7834% |
| High Growth | -15.0280% |
| SuperRatings Median Growth Fund (to March 2009)# | -22.47% |
# Source: SuperRatings Survey
* Financial year to date rates of return are from 1 July 2008 to 5 April 2009 and are net of taxes and fees.
We understand that for some it is difficult to maintain a long-term perspective during ‘bear’ markets such as the one we are all presently experiencing. But it must be remembered that superannuation is a tax-effective savings vehicle for retirement and as such is best formulated on the basis of long-term, risk-adjusted, investment strategies and plans that transcend short-term ‘boom’ and ‘bust’ investment cycles.
For example, in the period from 2002 to late 2007, Australian super fund investors witnessed very strong growth in investment returns, largely as a result of sustained “bull” runs in both domestic and international equities. During this period members of most super funds, including MilitarySuper, enjoyed returns in the mid to high teens fuelled predominantly by Australia’s domestic equity market.
However, investment markets tend to run in cycles and as referred to above, since the beginning of 2008 we have witnessed extreme volatility in markets around the world. Indeed from the high in November 2007 to the current lows in the Australian share market in February 2009, the market has experienced its worst performance in some 26 years.
In this environment most superannuation funds, but particularly those with larger exposures to listed equities, have declared significant negative returns for the first time in many years. For many new superannuation investors this is also the first time that they have experienced negative returns on their retirement savings.
It is important to remember that for most Members superannuation is a long term investment and a super fund’s investment performance will change from year to year. Over the long term your retirement savings will grow, but there will be years, or even periods of several years, such as now, where there will be multiple quarters of negative returns.
As unnerving as these periods are, this is a natural feature of investment markets and cycles—even ‘super’ cycles such as the one we are presently in.
Looking Ahead
MilitarySuper will continue to identify and put into effect strategies and plans that seek to preserve Member’s capital and grow their retirement savings as we have done for many thousands of serving and retired military personnel and their families for many years.
In particular, we will continue to critically examine and fine-tune our successful investment strategy which has to date acted to soften the impact of the current market down-turn on the Fund’s investment performance.
Additionally, we see the current investment landscape as soon offering once in a generation opportunities to identify and invest in good quality companies and business enterprises—be they in listed or private markets, at prices that represent good value and that afford MilitarySuper, as a long-term investor, great opportunities to invest and grow the Fund.
We look forward to reporting to you further as to our progress and experiences in these connections in both your 2008–09 Annual Report later this year and in the meantime via Latest News.
Paul Watson
Chief Executive